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Macroeconomics: Are we doomed?

PAUL KRUGMAN is reading last rites to the neoclassical synthesis (“the notion that monetary and fiscal policy could be used to solve the problem of recessions and depressions, and that once you did that, conventional microeconomics — with its favorable view of free markets — could go back to its old self”) which he argues has been exploded by the experience of the last six years. Mr Krugman says:First of all, the liquidity trap is real; conventional monetary policy, it turns out, can’t deal with really large negative shocks to demand. We can argue endlessly about whether unconventional monetary policy could do the trick, if only the Fed did it on a truly huge scale; but the fact is that the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment.Second, while the evidence from austerity programs strongly suggests that fiscal policy does in fact work, with multipliers well above one, the political economy of policy turns out to make an effective fiscal response to depression very difficult.So the neoclassical synthesis — the idea that we can use monetary and fiscal policy to make the world safe for laissez-faire everywhere else — has failed the test.What’s more, the end of “small-government Keynesianism” means that the rich world must become much more serious about reining in financial system leverage and dangerous financial flows, …